The Economist Intelligence Unit

China in focus

Too much housing?

For a developing country, China already has a high level of residential floorspace per person. But that does not mean the market is saturated already.

While long term macroeconomic and demographic drivers of housing demand in China point to strong underlying demand in coming decades, China's average living space per head, at just over 30 sq metres, is extraordinarily high given the country's current income levels. Looking at the reasons why China has so much housing, however, suggest that the situation will not change quickly, so current "overbuilding" is more a characteristic of China's housing market driven by taxation and social practices rather than a sign of a bubble about to burst.
Japan, in contrast, stands out as being a rich country with relatively small properties. Based on international comparisons, a country at China's level of GDP per head (PPP) should have 20.3 sq metres of living area, which would mean that China is 53% "overhoused". By contrast, the US is only 15% overhoused.

Clearly, there are more factors than income that determine living space across countries. Population density, for instance, plays a large role. Japan's population density is over 10 times that of the US and nearly three times that of China, going some way to explain why Japanese people live in such small spaces (capsule hotel, anyone?).

What are the causes and implications of "overhousing"? It is difficult to say. It could simply be the case that Chinese prefer large apartments to other goods and services. However, there are also a number of noteworthy characteristics in Chinese society which may account for its housing exuberance:

Property sector taxation: The absence of a significant nationwide property tax, such as that enforced in most other countries, greatly boosts the attractiveness of real estate in China. China has just began to experiment with property taxes, but they are currently at such a low level they are having minimal impact.

Small households: The average size of Chinese household is 3.3 (2.8 for urban households), which is relatively low for a developing country. The one-child policy has clearly played an important role here, however, ageing will also contribute to the growth of single households (men tend to die earlier than women), as will the gender imbalance and changing family values. The number of single-member households in China increased from 8.3% of total households in 2000 to 10.7% in 2005.

ender imbalance: China has the world's most skewed gender ratio for young persons, which has multiple implications for housing. A small but rigorous pool of researchers contend that gender imbalances, combined with a materialistic approach to marriage, is the reason behind China's high household saving rate. The excess of men over women in China means the latter can be more selective about their spouses while the former must try harder. Young men thus save feverishly, often with the help of their parents, to be able to offer their desired partners a suitably impressive home.

Building quality: While Chinese citizens enjoy living space that is nearly on par with their much richer Japanese counterparts, the quality of buildings is likely to be on a different level. It is difficult to obtain objective benchmarks on building quality across countries, but anecdotal evidence from China certainly suggests lower-quality construction. Pan Jiahua, a researcher at the Chinese Academy of Social Sciences, observed that the average lifespan of a Chinese building was 30 years, compared with 132 in the UK. "Tofu projects", as they are known, became the subject of much public consternation following the 2008 Sichuan earthquake. Shoddier construction holds costs down thus it is quite possible that there is a trade-off between home size and building quality.

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